A 3-dimensional approach to technical analysis
Cycles - Structure - Price projections

"By the Law of Periodical Repetition, everything which has happened once must happen again, and again, and again -- and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ... The same Nature which delights in periodical repetition in the sky is the Nature which orders the affairs of the earth. Let us not underrate the value of that hint." -- Mark Twain

A Review of the Past two Weeks

The decline which started at SPX 1229 on 3/07 continues, bringing with it the most market weakness since the early January top. All major indices have joined in, including gold, and perhaps we are beginning to see an intermediate top in crude oil as well.

The McClellan oscillator reached its lowest level since the long-term up trend started in 2002 and this may be an all-time low as well. However, since the decimalization of the A/D, the volatility of this indicator has increased considerably, and the comparison with a former historical period is not valid. Still, this represents significant weakness and suggests that the decline is an intermediate-term correction.

This is confirmed by the other breadth indicator, the NH/NL index, which has gone negative for the first time in almost a year.

Current Position of the Market.

SPX: Long-Term Trend - The long term trend turned up in October 2002 in conjunction with the 12-year cycle. It is now reinforced by the 10-year cycle which turned up in the Fall of 2004. A top is likely in late 2005, or early 2006.

SPX: Intermediate Trend - The intermediate trend which started in August 2004 is undergoing a correction and has found some very minor support after retracing .382 of the move. However, there is still no sign of a short-term low. The SPX is currently trading at 1172, and a normal 50% correction of that phase would take it to 1144.

SPX: Short-term Trend - The short-term trend is down and will probably continue down for a few more trading days.

Because of market volatility, the short-term trend is better analyzed on a daily basis with the help of hourly charts. This is done in our daily market updates and Closing Comments.

Daily market analysis: If you would like to receive an explanation of how I arrive at buy and sell signals and sign up for a free 6-week period of daily comments, please let me know at ajg@cybertrails.com.

What's next?

The move from 1164 to 1229 could be interpreted either as an a-b-c or a 5-wave pattern which completed the entire phase from August 2004 with the odds favoring the latter. Whichever it is, it does not make much difference since the corrective action from 1229 has further to go and the objective is to determine when that correction will come to an end.

Short term cycle lows are still ahead of us and extend into the first week in April. The correction should continue into that time period. When it ends, the ensuing rally will probably not take the market to new highs right away because some even more important cycles are scheduled to bottom in late June.

There is a valid Fibonacci projection to 1158. However, a drop below 1165 will trigger another projection to a minimum of 1149. This is reinforced by a potential 50% retracement to 1144.

Stochastics is deeply oversold, but does not show any divergence. The same can be said of the RSI and other momentum indicators. This suggests that the short-term correction is not over.

Both breadth indices, the McClellan oscillator and the NH/NL differential, are in the same technical position: oversold, but with no sign of positive divergence.

An analysis of other markets:

Gold and the Dollar: The dollar has gotten a new lease on life. It could continue to move to 1186, but until proven otherwise, this may still be a corrective pattern. It does not appear to be a major reversal at this time, but, at best, an extended base-building period.

The strength in the dollar has sent gold in a steep short-term decline which shows no sign of coming to an end anytime soon. The XAU (gold and silver index) which currently trades at 93, has an intermediate trend line support at 86. If it breaks that level, it could drop 6 or 7 points more to its long-term up trend line from the 2001 low.

There are things that are disturbing about gold's prospects for the future. One is that cyclically, there is a 8-9 year rhythm in gold which has a good history of regularity going back to at least 1976, If the cycle has topped out and its dominance persists, there will be 4 more years of decline in the price of bullion. This was mentioned as a possibility several months ago but, as a result of the recent action, the odds have substantially increased in favor of this analysis.

The daily chart does not show any sign of reversal yet and, as mentioned repeatedly before, the drop was forecasted by the shorting activity of the commercial traders who drastically increased their commitment at the recent top.

There is another factor which should be taken seriously. Besides the XAU, one of the best indicators for the price of gold has been ASA, a South African holding company. By 2001, in what was probably the bottoming of the 8-9 year cycle, ASA had established a Point and Figure base with a projection to 49. On 11/26/2003, the stock traded at 48 and has not exceeded that price since. A year later, as bullion was making a new high, ASA topped out at 45.81, thereby making a lower high. It is currently about 3 points above another important term trend line, and if it should break it and continue below 33, this would confirm its long-term down trend and lead to a target of just below 20.

Crude oil is also at a very interesting juncture. I have spoken of a projection for oil to 57/58 in what looked like the completion of a 5-wave pattern perhaps going back as far as $25. The price of oil came very close to 58 a couple of weeks ago, hovered for a while, and then quickly broke below 54. The present rally looks like a test of the highs/top building price action, and the next support level is about 50. The pattern in both the price and the indicators, is very similar to what took place at 55.

I also mentioned recently that the up trend in commodity prices, including gold and oil, were dependent on continued weakness in the US dollar. With the dollar reversing its trend, the CRB index has also suffered a sharp retracement in the past 2 weeks. It looks like a well established short-term trend all the way around, which could develop into something more serious later on.

Charts

Besides the daily chart of the SPX and GE -- my favorite leading index -- I also include a long term chart of bullion to illustrate the 8-9 year cycle, and a chart of ASA going back to 2001.

The SPX chart shows a clear break of the up channel, with the next level of support being 1165. But since projections call for a potential low of 1158 which would send prices below that support level, there is a good chance that we will retrace all the way to 1144, which is a 50% retracement of the entire up trend, before the short-term trend ends. Notice the notation about the condition of the indicators at the bottom of the chart. Notice also how these indicators anticipate turning points (vertical lines).

GE is just about the only leading indicator that I follow which is still acting well in this decline. It has held the 35 level twice now, and recently had a good rebound while the market has continued down. Note how much stronger the RSI is, when compared to the SPX. If the stock continues to hold up well, it will signal an end to the downtrend, even if this turn out to be temporary. Two other leading indicators, the XBD and the Banking index which are not shown here, have less bullish patterns.

The third chart is that of the very long term trend in bullion which goes back to 1976. It clearly shows a dominant 8-9 year cycle which may be in the process of topping out. What is also apparent, is that the first four years of the current cycle were stronger than those of the last cycle. This may indicate that the next four years will not bring the kind of weakness that took place from the last cycle top. Still, this a warning that gold may be at risk of being in a down trend for some time to come.

The above chart is given confirmation by the weekly chart of ASA, which, as pointed out earlier, is very close to breaking its lower median line once again. The heavy line represents the long term trend from 2001. It was decisively broken and March 2004, just after the stock reached its 48/49 projection. ASA has essentially been marking time since, while bullion was making new highs. You will also notice that the RSI has started a sharp decline, but is not anywhere near being oversold. I would expect the 33 level to be challenged once again.

SUMMARY:

A sharp correction of the intermediate trend which began in August 2004 is underway, but it still has not made a normal 50% retracement. To do this, prices need to continue correcting to 1144.

With short term cycle lows bottoming as far out as the first week in April, and the daily oscillators showing no divergence, it is likely that the short-term down trend will continue for a while longer.

Structurally, this is probably an "a" wave of an a-b-c correction. There are more important cycles bottoming in late June, so one should expect that the entire correction will last into that time period.

The sharp decline since 1229 is probably caused mostly by hedge fund activity which now accounts for a large percentage of trading. This, and a very sharp increase in program trading, have caused higher than normal volatility which reflected not only in the price action, but in the McClellan oscillator as well.